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Forecasting volatility in the Spanish option market

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  • Pilar Corredor
  • Rafael Santamaria
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    Abstract

    The performance of several alternative forecasts for the Ibex-35 index options market data is compared and a test for market efficiency of the Spanish Option Market with respect to volatility forecasts provided. The forecasts include time series, implied volatilities and composite specifications using both parametric and nonparametric ways. It is found that the choice of the best model depends on the error measurement that depends on the ultimate purpose of the forecasting procedure. Also the results generated from an ex ante arbitrage strategy are not different from zero at conventional significance levels once the transaction costs are taken into account. This result supports the hypothesis of the market efficiency of the Spanish Option Market.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0960310042000164176
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 14 (2004)
    Issue (Month): 1 ()
    Pages: 1-11

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    Handle: RePEc:taf:apfiec:v:14:y:2004:i:1:p:1-11

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    1. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    2. Nelson, Daniel B., 1990. "ARCH models as diffusion approximations," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 7-38.
    3. Brailsford, Timothy J. & Faff, Robert W., 1996. "An evaluation of volatility forecasting techniques," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 419-438, April.
    4. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
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